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As word trickled out over the past few years that our law enforcers had punted on prosecuting one banking industry bum after another, I’ve frequently told friends it struck me as a glaring example of a prosecutorial failure of imagination.

What I wanted to know is this: Where’s New York’s Martin Act, which Eliot Spitzer wielded to out corruption in Wall Street research, hedge fund and mutual fund late-trading and market timing and “spinning” of coveted pre-IPO shares? Where are the prosecutions over failure to provide “honest services,” which federal prosecutors used to put former Enron boss Jeffrey Skilling behind bars for a couple decades?

A failure of imagination? Not according to Gretchen Morgensen and Louise Story in their provocative piece in today's New York Times. Rather than describing a failure of imagination, this fascinating story tells of regulators and prosecutors who appear to be guilty of a failure of inspiration.

The article describes banking regulators abdicating their duty to refer cases of misconduct to law enforcement for prosecution—and of prosecutors abdicating their duty to ply their trade vigoriously. The reason appears to be not so much a grand conspiracy as a diffuse one. Countrywide, the Times indicates, was put off-limits to the Financial Crisis Inquiry Commission by jittery Republicans. Perhaps they were afraid an honest airing of who was on the “Friends of Angelo” list, and what goodies they received from Countrywide’s boss, would do severe damage to their political careers.

In other instances, it seems there were legitimate policy questions raised about whether it would serve the greater good for the feds to go after financial institutions for legal infractions, and large financial settlements, at the same time the government was bailing them out. “This wasn’t so much a political thing as ‘We don’t know if it makes sense to bring a big penalty against a bank that just got a big check from the government,’” says an unnamed source of the Securities and Exchange Commission’s thinking in the Times story.

That’s all fine and well as far as it goes. But the top executives at the major financial institutions that ultimately needed bailouts didn’t receive government checks. What a lot of them did receive were vast riches in the form of stock, options and bonuses--in some cases as they talked up their companies publicly while expressing serious doubts in private. Isn’t there anyone left in the government who can say “securities fraud”?

To me the moral of this story is that Washington has created a vast immoral hazard. We are all truly in a world of peril when regulators and law enforcers believe our financial institutions are too big to be brought to justice—and when our leadership in Washington is so gutless that its response is to let these same institutions emerge bigger and more beyond challenge than ever.